ACROSS much of Europe, industrial activity is flat or falling, unemployment is at record highs, and discussions rumble with concerns of an agitated autumn as more workers face poor job prospects.
So why are stock markets in Germany, France, and Spain - three countries whose economic fundamentals reflect most glaringly Europe's recession - enjoying record highs after a summer of the big rally?
The surge in European markets ``has nothing to do, of course, with present economic performance,'' says Peter Pietsch, senior economist at Commerzbank in Frankfurt. ``It's all about anticipation.''
What market investors anticipate is a steady fall in Europe's interest rates and a pickup in activity next year, say analysts in Frankfurt, Paris, and Madrid.
Longer term, what the markets are anticipating is one of their favorite scenarios: a period of sustained growth with low inflation, driven by companies that are much leaner than they were before the downturn. That should mean higher profits.
``We are coming out of a period of four to five years where market activity was slight, but during which time there was a considerable restructuring of industry, with cutting of fat and an impressive refocusing on exportable goods, especially in France,'' says Alain Leclair, vice-chairman of Paribas Assets Management in Paris. ``Now we are in a cycle of a revaluation of shares.''
A scenario already played in the United States is crossing the Atlantic. ``The US was the first country to go into recession, with Canada and the UK,'' Mr. Pietsch says. ``Now they're first out of the trough, having forced down interest rates. People are expecting a transfer of the same picture over here.''
In fact much of the steam behind Europe's rally is coming from American investors who have already played their hand in the US bull market, Mr. Leclair says. Now they have turned to markets with room for growth.
The surges have been impressive. In Frankfurt, the market is up about 25 percent since the beginning of the year, while the Paris market is up about 20 percent - about half of that just since Europe's monetary crisis at the end of July. Madrid, although a much smaller market, has climbed 42 percent. Each time a slight price drop leads some analysts to warn of a correction the market surges ahead again.
Madrid's raging bull has taken market analysts by surprise. ``At the beginning of the year we thought the Madrid index would reach 228-230 by the end of 1993,'' says Ricardo Paz, a stock analyst with FG Inversiones Bursatiles. ``But here we are at 300.''
Like much of Europe, Madrid is anticipating a substantial cut in interest rates, and like Germany, Spain is showing signs of economic recovery. But the main reason for Madrid's rocket performance, Mr. Paz says, are the foreign investors who ``found that compared with many other markets in Europe, Madrid is cheap.''
Prospects for Madrid through this year will depend largely on the ``social pact'' the government is negotiating with the country's labor unions. Failed talks or a too-generous accord would dampen the market, Paz says. But Spain's impressive progress in trimming inflation, and the working relationship the minority Socialist government has developed with the conservative nationalist parties, are two positive signs buoying the market.
Failure of Europe's interest rates to come down ``still a lot more'' could place clouds over the markets, Leclair says. So all eyes will continue to follow Germany's Bundesbank in anticipation of regular, gradual cuts.
Given Europe's industrial restructuring, low inflation, promises of lower interest rates eventually, and large savings reserves, Leclair says Europe's strong markets are around for a while.